The choice for the Finance Minister was limited. Nirmala Sitharaman had striven hard to rev up the economy that was on a continuous decline for over two years. With the scope for raising revenues limited, the finance minister has focused on the medium term, tapping non-tax sources for revenue.
THERE HAS BEEN a shortfall in revenue receipts, an increase in expenditure and resort to a larger quantum of debt to bridge the gap. Since presenting her first budget in July last, Sitharaman’s government has been endeavouring to reduce taxes to attract investments and to expand demand for goods and services. There was a substantial reduction in corporate taxes, by more than 10 percentage points, to around 22 per cent with a lower tax rate of 15 per cent for new manufacturing companies. The budget has proposed reliefs in personal income tax, the abolition of dividend distribution tax and a slew of measures to attract foreign investments.
Look at the picture of revenues for 2019-20: there was a significant deficit of over Rs 7.6 lakh crore between receipts of Rs 19.32 lakh crore and expenditure of Rs 26.99 lakh crore. For close to 15 years, finance ministers have been struggling to achieve a fiscal deficit of 3 per cent of GDP. Unable to achieve the goal set for successive budgets, governments have been resorting to fudging the accounts by not accounting for the enormous debts incurred under other heads like Food Corporation of India or transferring the burden to the following year.
This time there has been an honest admission and a measure of transparency in the finance minister admitting the fiscal deficit shooting up to 3.8 per cent of GDP against the budgeted 3.3 per cent. She pointed to the Fiscal Responsibility and Budget Management Act (FRBM), providing for a trigger mechanism permitting this. In the estimate for 2020-21, expenditures are projected at Rs 30.42 lakh crore against receipts of Rs 22.46 lakh crore on the assumption of nominal economic growth of 10 per cent and the deficit targeted at 3.5 per cent of GDP.
Tapping non-tax sources
There is a large commitment of Rs 102 lakh crore on infrastructure development over the medium term: the budget provides for an investment of around Rs 18,000 crore for next year. There are also larger allocations to various sectors, notably agriculture and allied activities, health, education, women and child welfare and weaker sections. Due to a fall in the growth of revenue receipts, the budget looks for funding through non-tax measures. The budget relies heavily on a much higher level of disinvestment as also on revenue from telecom through spectrum sales and taxes.
Remember the NDA I government led by AB Vajpayee taking the initiatives under these heads? Arun Shourie, as Minister of Disinvestment, aided by an effective bureaucracy, made a good success of disinvestment. NDA I government’s new telecom policy also opened up the telecom sector. Successive governments did attempt to continue with this. The successor UPA government, constrained by its dependence on support by the CPM, had to resort to some ingenuous methods. P Chidambaram regularly made prosperous, profitable institutions, notably LIC and public sector oil companies, to buy government shares from other PSUs for meeting disinvestment targets.
Disinvesting blue chips
The NDA II has been expressing its intent to reduce its holding in PSUs substantially, particularly of public sector banks that have been demanding frequent capitalisation of funds as also in outright privatisation. In recent years these account for a whopping Rs 350,000 crore. In the light of the difficulty of getting an attractive value for disinvesting these, the government had come out with plans for privatising some of the bluechip PSUs – BPCL, CONCOR, and Shipping Corporation.
Due to the time taken in firming up the details, these tasks could not be completed in the current financial year. The finance minister has proposed a much higher target of disinvestment, of Rs 2.1 lakh crore, for next year. The government has taken bold to announce the conversion of the LIC into a public limited company. LIC, with its asset base of an estimated Rs 31 lakh crore plus, would have a market cap that will be several times those of prized blue chip companies like Reliance and TCS. Of course, the strong employee unions of public sector companies and political parties in opposition would fight such a move tooth and nail.
Applauding wealth creators
The NDA government has the strength in the Parliament. Such measures could be taken only in the initial months of its success after the polls. So the NDA government would endeavour to forge ahead.
The direction was indicated in the Economic Survey presented by the Chief Economic Adviser, Krishnamurthy Subramanian, to the Parliament a day earlier. The recognition of the role of wealth creators, privatisation, phasing out of archaic regulations that had outlived their purposes like blanket stock limits, Drug Price Control, Essential Commodities Act (ECA), debt waivers and government intervention in grain markets.
A non-tax-compliant society
IE has been advocating a targeted increase in the number of income tax payers. There has not been a significant increase in the number of tax returns filed; more miserable is the poor increase in the number of taxpayers over the last two decades. Times of India presented a graphic picture: “only 4.18 per cent of the population filed tax returns, and only 3.8 per cent of Indians paid income tax in 2018-19.” Arun Jaitley, while presenting the budget in February 2017, pointed to India as a non-tax compliant society. The predominance of cash transactions in the economy makes it possible for people to evade taxes. When such large numbers evade taxes, the burden falls on those who are honest and compliant.
Levy just Rs 1200 tax per capita on an income of over Rs 120,000!
The efforts made by the government in recent years to move towards digitisation, GST and other initiatives would help file tax returns. The budget proposal to simplify the filing of tax returns should help. There is a strong case for reducing the threshold limit for income tax with modest rate slabs and a progressive increase for higher incomes. With the per capita income of more than Rs 10,000 p.m, a contribution of Rs 100 p.m as direct taxes should be feasible. It should also be made obligatory as a duty of the citizen to file a return on his income. This would help accelerate the monetisation of transactions, inculcate pride in contributing to nation-building and a substantial relief in indirect taxation. eg. tax on matchboxes. With extensive digitalisation and computerisation, it is today possible to attempt this.
If Nirmala Sitharaman set the record for the duration of her first budget speech in July 2019, she pushed it back with a longer address, of around 156 minutes and was getting too tired to complete the rendering. The Prime Minister and the Defence Minister persuaded her to take the balance portions as read. In her well-articulated marathon speech, Sitharaman pointed to liberal allocations to different sectors.
Agriculture needs structural reforms, not band-aid solutions…
She dealt at length on attention to agriculture, irrigation, and allied activities. She outlined a 16 point programme for agriculture development. The move towards value addition is welcome. The jump in the production of horticulture to an estimated 320 million tonnes against foodgrain production of around 286 million tonnes and fish production at 200 million tonnes are quite impressive and welcome. Over the past ten years, credit extended to agriculture has been expanding. For 2020-21 the budget proposed credit of Rs 15 lakh crore.
IE has been pointing to the low productivity inherent in the highly fragmented farm sizes; these average two acres in Tamil Nadu that too splintered at two or three different places. The three model bills suggested need to be adopted in quick time by the states. At the base of this should be the agglomeration of land to viable sizes that will lend for the application of science, technology, and management. Of course, this should be done without alienating ownership, permitting lease of land over 15 years and more. The entry of corporates will have revenue possibilities.
Tax prosperous farmers
A sizeable portion of the surplus production of foodgrains or horticulture products is contributed by prosperous farmers. It is also common knowledge: affluent sections of the business community, professionals and politicians own large farms. These benefit from the exemption of tax on agricultural income. There is a case for looking closely into this issue and bring these prosperous ‘farmers’ under the tax net.
Welcome plan to curb imports
The finance minister has addressed the much-needed issue of curbing imports of goods that could be manufactured in India. IE has been pointing to cheap imports of toys, footwear, agarbathis, kitchenware, fans and electrical appliances, laptops and PCs from China. The sizeable expenditure incurred by the Tamil Nadu government in offering mixies, grinders and fans free to its citizens is benefiting China through importing these. These have been resulting in a sizeable adverse balance of trade with China. The possibility of China using the Regional Comprehensive Economic Partnership (RCEP) for routing exports of such products through its units in ASEAN countries was a reason for Prime Minister Modi declining to join RCEP. US President Trump has realised the harm done by indiscriminate imports from China through a liberal trade regime. The budget proposal to check the dumping of goods and imports of subsidised goods should be welcome especially for the MSME sector.
India as an assembler…
The Economic Survey points to the importance of developing India not just as a manufacturing power but as an efficient centre for assembling mass consumption products like shoes and cell phones. The Survey points to the modest value realised by China through the assembly of Apple phones – just $ 8.46 (3.6 per cent) in the total cost of $ 237.45. The sheer volume results in revenues in billions of dollars.
In the issues we produced on Tamil Nadu for the Global Investors’ Meet, January 2019, we had pointed to the Taiwanese companies, Feng Tay and Foxconn, precisely doing this: Feng Tay employs around 23,500, mostly women (18,500), not even literate, drawn from the rural belt around Cheyyar, trained in less than eight weeks to assemble Nike shoes in millions for exports to the US and Europe; Foxconn employs 15,000, mostly women, each in two plants at Sriperumbudur and Sri City to assemble cell phones. Foxconn, which earlier assembled such phones for Nokia, has started assembling Apple phones at its sprawling facility at the old Nokia complex at Sriperumbudur. These plants employ local women in thousands on decent wages and are highly successful ventures that assemble imported components. The potential for becoming part of the global supply chain appears excellent and attractive.
A simple tax return form
Successive finance ministers have been endeavouring to rationalise and simplify the tax regime. P Chidambaram did attempt these through finetuning the FRBM and direct tax code. But these have been making slow progress. A simple form for filing tax returns without the help of a chartered accountant is still a dream.
Nirmala Sitharaman’s efforts to do away with exemptions and reductions in income tax rates are thus welcome. Her promise of a tax charter to boost trust between citizens and authorities will improve the efficiency of tax administration and enthuse the honest taxpayer and wealth creators. This will contribute to the ease of living and ease of doing business.
Meeting the trust deficit
The tax administration is bogged down by the burden of humongous litigation. The process involves multi-layers of tax tribunals, high courts and the Supreme Court and result in the prolongation of disputes for decades. The finance minister pointed to Sabka Vishwas Scheme of the last budget attending to this as also to liberal resolution schemes that have helped clear 189,000 cases pending on indirect tax disputes; and to 483,000 direct tax cases pending in various appellate forums, ie. Commissioner (Appeals), ITAT, high courts, and the Supreme Court. The proposal to bring a similar SabkaVishwas scheme for reducing litigations in direct taxes should be welcome.
Under the proposed ‘Vivad Se Vishwas’ scheme, a taxpayer would be required to pay only the amount of the disputed tax and will get a complete waiver of interest and penalty provided he paid it before 31 March 2020. Those who avail of this scheme after 31 March 2020 will have to pay some additional amount. The scheme will remain open till 30 June 2020, the budget proposed.
The proposal to eliminate personal interface in dealing with tax matters is another vital element that can reduce delays and corruption.
Protecting bank deposits
The budget has proposed to increase the insurance cover for bank deposits to Rs 5 lakh from Rs 1 lakh. The recent crisis of the Punjab and Maharashtra Cooperative (PMC) Bank that impacted BJP in the elections to the Maharashtra assembly, is perhaps a trigger for this welcome proposal.
SOME Welcome POETRY
I have been perusing and commenting on budget speeches for close to 50 years. From the time of Y B Chavan to Arun Jaitley, I have had the opportunity to interact with the finance ministers at the annual Economic Editors’ Conferences. From the matter-of-fact pedestrian presentations, the budgets of recent years are also embellished with poetry and delectable quotes. Manmohan Singh is remembered for making references to his personal life and to Urdu quotes. Chidambaram liberally quoted Tirukkural couplets. The multi-lingual scholar Sitharaman enlivened her speech with appropriate quotes from Kashmiri poet Deena Nath Kaul Nadim, Kalidasa, Avvaiyar and Tiruvalluvar, all so relevant that provided relief in her marathon speech. Do I see the inputs from her team at North Block, notably the erudite Dr. T V Somanathan and Dr. Krishnamurthi Subramanian, in providing these welcome nuggets?